UPDATE: Baikal to capitalise on growing OTC market

Baikal, the new dark multilateral trading facility to be launched by the London Stock Exchange (LSE) and Lehman Brothers in Q1 2009, will aim to capture a piece of the growing market for executing orders in the dark.

Baikal, the new dark multilateral trading facility to be launched by the London Stock Exchange (LSE) and Lehman Brothers in Q1 2009, will aim to capture a piece of the growing market for executing orders in the dark.

The size of the OTC equities market in Europe is estimated at 20% of total trade value. “We think that the 80-20 split is going to move towards 50-50 over time and that’s why this is a very important initiative in terms of solving liquidity problems in Europe,” John Lowrey, head of European electronic trading services, Lehman Brothers, told theTRADEnews.com.

Demand for dark pools is growing because buy-side traders are being asked to execute larger orders against a background of shrinking on-exchange order sizes. “Effectively, the mechanism isn’t really working for wholesale movement of assets,” said Lowrey. “Feedback from our customers suggests there is a lot of flow out there seeking this type of answer. We are very positive that we will get sufficient market share to make it work properly.”

In particular, Baikal is expected to appeal to large institutions that currently trade significant blocks of stock in existing dark pools. The broker-neutral venue will offer access to securities in 14 countries and provide smart order routing to liquidity in at least 22 trading venues.

“Baikal will be more efficient than other dark liquidity sources because it includes all of their features, aggregates all the different platforms, and has the added advantage of neutrality. We have no interest in the content of the business executed on the platform,” an LSE spokesperson said. “The sophisticated anti-gaming controls and market surveillance tools will ensure that it is genuinely dark.”

Lehman’s Lowrey said that Baikal’s order routing and algorithms would be a source of competitive advantage over other dark pools. Initially, the investment bank will provide a set of tailored liquidity-seeking algorithms on an exclusive basis to Baikal. “In time, algorithms will be put on the platform from other broker-dealers,” Lowrey said. Lehman also provides customised anti-gaming logic to the platform.

The LSE said Baikal will offer clearing and settlement for the trades it routes on to other venues as well as those executed in house, but declined to provide details on post-trade partners. “For clearing and settlement services, we will be working with another bank, which we will announce in due course,” said the LSE spokesperson.